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The Rt Hon Mark Field MP

The Rt Hon Mark Field MP, addressed delegates at the European Capital Markets Forum on 18 June 2015.

The Rt Hon Mark Field MP, Cities of London and Westminster - keynote speech

"I suppose I should be grateful that my old friend, Andrew Marshall of Cognito, did not ask me to deliver this address six weeks ago.

My powers of prediction for the UK General Election – in which I was a participant! – would only have convinced those of you who do not already believe that politicians invariably have no idea what they are talking about that this lecture would have been worthless!

Well, in truth we were in good company assuming that the UK was heading into a period of potentially damaging political uncertainty. So whilst there is relief from the City that minority government or the prospect of a Labour/SNP alliance instinctively hostile to business has been avoided, there remains some foreboding. The stark truth is that the spirit of the age remains more hostile to enterprise, profit and wealth than any of us whose careers began only in the last quarter of a century have experienced.

As the City’s MP during these turbulent times I have often been frustrated at my own Party’s reluctance to make the case unashamedly for sound money free markets. Rather than playing to the gallery of public opinion over tax avoidance or nom-doms we now have breathing space of five years in office ahead. The Chancellor of the Exchequer has already made some moves towards repairing the somewhat strained relationship with the City. The era of new regulation upon new regulation is over; the bank levy will be tailored to a genuine rescue fund rather than a bottomless pot of cash to assist in deficit reduction; the public finances will, if all goes to plan, be converted via sustained growth and public spending cuts. Tax-rises will only be on the agenda if Plan A fails to have the desired impact on deficit reduction.

Now I wouldn’t be a real-life Conservative MP if I were not to turn my attention, especially with this sophisticated pan-continental audience (or that’s what Florencia Panizza assured me would be here!), to matters European.

If David Cameron is serious about maintaining a workable relationship within the European Union, one of our nation’s most important alliances, he needs urgently to stand up to the fantasy that the EU is a constant conspiracy by foreigners to undermine British interests.

One lesson of last September’s Scottish referendum is to make a case that owes as much to emotional as economic or rational impulse. The United Kingdom of tabloid myth is a nation that has always stood proudly apart from the continent, with our unique culture of entrepreneurship, intellectual endeavour and empire developed in isolation from Europe. In truth, the story of the UK – from ancient invasions of our shores to British military adventures on the continent; the trading of goods to the sharing of intellectual ideas; familial exchanges among continental historic monarchies to the nurturing of relationships between ordinary citizens – is one of centuries-old cross-pollination with our European neighbours. Philosophical battles and religious frictions across this continent have shaped the collection of secular nation States that, while infused with Christian values, are (thankfully) ruled by law not religious ideology.

Naturally Europeans might happily operate as an unbound collection of individual nation states. But the question is whether we can continue to achieve more in close alliance. Last autumn, many English, Welsh and Northern Irish folk reacted with dismay as our Scottish counterparts willingly contemplated throwing away, a framework of values and institutions within a UK in which national differences could flourish.

We see a sad reflection of precisely those tactics in the current debate over the UK’s future in the European Union. The challenge for Europe has always been to balance creative friction and competition between nation states without sparking war. It was a balance which European leaders struggled to resolve until the formation and gradual expansion of the EEC. For all the Union’s faults – and they are legion – perhaps too often we take for granted the fact that three generations of Europeans have been able to take for granted peace on our continent. This is a remarkable historic achievement that must be celebrated more whole-heartedly. Indeed with the UK’s own near obsession of commemorating both twentieth century World Wars not to mention Waterloo this should not be a difficult case to make. Nor is it one which is forgotten by our Eastern European parties who cling even closer to the Union in the shadows of a resurgent Russia.

I am proud of all that the UK has brought to the European Union. We act as an essential bridge between the EU and the English-speaking world. We provide a crucial counterweight to the established Franco-German axis and we bring real economic clout. We should now defend the Brussels institutions that we have helped create as providing a decisive means for international cooperation in insecure, testing times. In my view the Council and Commission are a bulwark of collective continental security rather than reflecting an irretrievable loss of British national sovereignty.

I need not tell everyone here that – in principle at least – the Single Market meanwhile provides one of the finest examples in global economic history of international cooperation to the benefit of hundreds of millions of Europeans. This vast economic zone, larger than the combined GDPs of the US and Japan, provides a level playing field in which UK businesses can trade. This has allowed the City of London to supply legal, financial and professional services with ease to our European neighbours. Our fledgling IT firms, to name but one industry where we enjoy a competitive advantage, have been able to access markets swiftly without complying with 27 different sets of regulations. British car manufacturers have been able to enjoy a resurgence with the investment that has flowed from foreign firms seeking a base from which to access the continent.

The founding principles of European cooperation include free labour movement. In the fierce domestic debate about immigration it is worth making the case forcefully that the UK economy, not least here in the City of London, has and remains a huge beneficiary of skilled migration before seeking (rightly in my view) to promote tougher sanctions for those EU migrants neither willing nor able to contribute economically to another country. Our system of welfare benefits will need to be contributory, like much of Europe, rather than paid out automatically to migrants – and the indigenous population – on the basis of need.

Nevertheless if we are to stand any chance of success in extracting significant concessions we need to be, less belligerent in tone and mindful of how we are perceived by fellow Member states. Many in France, for example, are perplexed by British hostility to the deal we enjoy in the EU. According to their view the EU is a club that has vastly expanded eastwards in the past decade at the UK’s insistence. The founding principles reflect British values of free trade, a massive single market and open competition for goods and financial/professional services. Moreover, it is a club whose other Members have granted the UK permanent exemption from both the single currency and Schengen area.

Margaret Thatcher famously handbagged her way to a rebate in 1984, but thereafter it was the implied threat that helped her negotiate favourable deals. To many in Brussels, the UK is nevertheless seen as the eternal complainer, whose appetite for EU reform will never be sated. Ironically it is exactly the same sentiment that the remainder of the UK has to the seemingly endless devolutionary demands of Scottish nationalists.

I accept that for those without the continental blood I am proud to have in my veins it is difficult to attach a romantic ideal to Europe. However, one monumental moment that still brings a tear to my eye when I watch it again is the sight thirty years ago at Verdun of French President, Francois Mitterand, grasping German Chancellor Helmut Kohl’s hand as they stood together in commemoration of those who died in the fiercest battles of the Great War.

Deep down I believe there is an emotional case to make for Europe. Not perhaps its bland institutions and faceless bureaucrats, nor the reconciliation of competing national interests that means its rules reflect the impurity of compromise. Nevertheless the European Union remains a powerful symbol of togetherness in a world crumbling into ever smaller blocs of ethnic, religious and nationalist narrowness.

Please forgive me now if I turn to a more general economic theme.

I believe on matters economic the new government would be wise, to raise its horizons beyond European adventures to addressing the sustainability of the UK’s recovery in an ever expanding sea of global debt.

Paradoxically, even before the election there was some recognition of the ‘red lights on the dashboard’, if only to the extent that the Chancellor of the Exchequer (our Finance Minister) was able to adopt new market projections for government borrowing costs between 2015 and 2020 and magic away over £50 billion of debt interest costs for the period. This enabled the Office of Budget Responsibility (OBR) to maintain the politically convenient fiction that by 2018-19 the deficit will have been wiped out. I must confess I meet very few City of London economists who genuinely believe that the UK’s current account will end the decade in surplus.

It is important that we recognise precisely the message from the markets in the pricing of the global mountain of debt – and how that bleak assessment contrasts to the healthy projections of real economic growth in the years ahead.

In June 2010, as the last parliament began the Chancellor assumed the then £1.32 trillion of accumulated national debt would cost £66.5 billion annually to service. Yet now, half a decade on, after a passage of ‘austerity’ that in fact has produced successively five of the seven largest annual deficits in UK economic history, the debt pile has risen to £1.63 trillion. But here’s the rub – this expanded borrowing and enlarged debt will, apparently, require a mere £51 billion a year in debt interest. So much for the penalties to be paid by any government daring to borrow and spend recklessly!

So why are the herd of investors in the capital markets pricing government debt with such deceptive, perhaps ever dangerous, calm? Incidentally it is worth noting these record low interest rates apply to government bonds issued by all but the most basket-case economies in the Eurozone. In large part there is a fear that deflation may be here to stay and a prolonged period of stagnant, very low growth may be in the offing. In such uncertain circumstances taking on government debt may indeed seem the safest bet. Add the impact of quantitative easing and the regulatory driven excess demand for bonds which has helped reduce the cost of borrowing by governments.

However, at the self-same time our own OBR, along with the IMF, projects healthy growth for the UK economy in the years to come. Not a Japanese-style deflationary stagnation implied by the pricing of government debt, but solid growth year-on-year at a rate of 2.5 to 3%. The trouble that lies ahead for the UK economy is that once the markets catch up to this reality it is surely a racing certainty that the costs of servicing that ever growing pile of debt will rise – and fast. In short and paradoxically, it is a sustained economic recovery that risks blowing a huge black hole into future years’ budgets as the UK continues to grapple with the vastly expanded debt accumulated over the past decade. This is why drastic and determined government action on deficit reduction remains so critical for the medium-term health of the UK economy.

At the beginning of the year analysis by the McKinsey Global Institute revealed that global debt – the accumulated borrowing of governments, companies and households – had risen by 17% since the final quarter of 2007, when the collapse of Bear Stearns and Lehman Brothers was in the offing. Even here in the UK all too often the efforts by households to pay down debt have been outweighed by further government borrowing. It is difficult to envisage how this will all end – other than very painfully.

None of this is new – for it was as long ago as June 2006 that the central banks’ club, the Bank of International Settlements, struck a firm note of caution about the dangerous levels of accumulated debt that had been built up in the global economy. Government debt, personal debt and over-leverage. This was two years before the crash, remember. When the crisis came in autumn 2008 the classic Keynesian solution to the crisis was QE. Nevertheless, the racking up of debt on this scale represents the biggest experiment ever conducted in the global economy. Seven years on from the eye of the financial crisis storm, and a considerable way presumably into the next upcycle of economic activity, all that has happened is that an even greater debt pile has accumulated without any collective plan to pay it off having been conceived, yet alone put into practice. Short of the unleashing of a burst of unprecedentedly high levels of output and sector-wide productivity growth or else a programme of fiscal contraction hard to imagine in an era of welfare entitlement and dependency not to mention universal suffrage, it is impossible to see how the developed world will ever be able to repay these levels of debt.

Even history may not provide much of a comforting guide as we may really for once have entered an era that is ‘different this time’.

Historically governments have dealt with large debt overhangs by allowing a little inflation to develop. As we know this is always perilous as a small dose of rising prices often leads to higher levels still (in fairness the huge post-crash stimulus has not despite natural fears triggered such an orthodox outcome). The alternative is to induce what economists call ‘financial repression’.

The double whammy of the 1930s depression and the cost of fighting World War II in the following decade left Western economies with equivalent debt levels relative to national income. Between the 1950s and 1970s yields from government bonds were set at just below inflation. As a consequence of the alchemy of compound interest, our collective borrowings, albeit in an era of persistent and strong economic growth, were in time paid down to manageable levels.

Whilst this might be a comforting parallel, there are also some key differences. Most importantly, we live in an age of free cross-border capital flows and much of our borrowing comes from international sources. The model of squeezing creditors by negative real interest rates and rising prices does not work when credit is denominated in a foreign currency or in a deflationary era. We need only to look at the travails of the Eurozone to see the limits of imposing financial repression when nation states are locked into a monetary straitjacket.

Not that we should be too complacent closer to home. Such a high share of UK government debt is now controlled by foreign creditors that any significant weakening of sterling would render our own public finances extremely vulnerable.

We hear much of the fact that one-third of UK government bonds have been mopped up by the Bank of England. This has helped keep interest rates artificially low (76 months now at the emergency 0.5% level). However, potentially more distorting still is the fact that over forty percent of our gilts are owned by foreigners. In an uncertain world these overseas creditors may take on the chin the repressing impact of artificially low returns on their bonds yielding less than the underlying rate of inflation. However, they may be far less sanguine at the impact of currency risk. If the currently benign market sentiment about sterling, despite record current account deficits, were to turn and the pound to fall, sterling denominated gilts in the hands of foreign investors will lose value. The prospect then of such overseas creditors losing confidence in the UK economy and selling off their bonds would have a potentially disastrous impact on the cost of servicing our debt. This is precisely what I suspect would have happened in the event of an indeterminate General Election result, particularly if the outcome had been a minority Labour administration. Whilst that eventuality has thankfully been avoided, we should remember that the economic fundamentals remain as precarious as ever.

For this reason it is all the more important that government here and across the developed world persists as a matter of national urgency to reduce the deficit and ensure that it lives within its means as rapidly as possible.

Whilst debtors, especially those servicing large debt piles, may welcome persistently low interest rates, they are a reflection of continued economic fragility rather than a clear sign of imminent economic recovery. Any sustainable economic recovery will require a path towards normal levels of credit pricing. After six and a half years of that emergency 0.5% rate, businesses and individuals worryingly if understandably now begin to see this as some sort of new norm.

What should concern policymakers more than it evidently does at the moment is that it is difficult to imagine the circumstances in which the cost of credit might be raised without the economic roof falling in."

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“Credit” market data for use on the Capital Markets Forum includes Corporate IG, Corporate HY, Corporate Other, Covered Bonds, Sovereigns, Supranationals and Municipalities as defined by the Trax database.